Gold rate today: Why can’t India afford weakness in gold prices for long? — explained

Gold rate today: After losing around 9 percent against its 17th July 2024 high, gold price on the Multi Commodity Exchange witnessed some value buying at the lower levels on Thursday, which has continued for the following three sessions. MCX gold rate today opened with an upside gap at ₹68,273 per 10 gm mark and touched an intraday high of ₹68,600 per 10 gm within a few minutes of the commodity market opening. According to commodity market experts, gold prices today are rising for two reasons: colling US inflation and buzz for the US Fed rate cut in the US Fed meeting.

According to stock market experts, a rebound in gold prices today is good news for the Indian economy as we can't afford the weakness of gold prices for long. They said the Indian government had already reduced customs duty on gold and silver, triggering the sharp selling of precious metals. If the global triggers had continued to remain weak, then chances of a higher amount of gold import would hit the nation's dollar reserves. So, in that case, the Reserve Bank of India (RBI) had to intervene by releasing some of its gold reserves to control inflation. They said cheaper gold may become another crude oil for the national economy.

Why cooling gold price is dangerous?

On why rising gold rates today are good news for the national economy, Anuj Gupta, Head of Commodity & Currency at HDFC Securities, said, "After the announcement of a reduction in customs duty on Gold and silver, the precious metal witnessed strong selling in India as the domestic market was adjusting with the new effective rates after the customs duty was announced to reduce from 15 percent to 6 percent. Global indicators were also weak due to sluggish Chinese physical gold market demand. So, gold prices in India crashed around 9 percent while nosediving around 4.5 percent in the international market against its 17th July 2024 high. However, we have witnessed some value buying in Gold for the last three sessions, which is expected to provide some relief to the RBI as sharp correction in gold prices are expected to fuel gold imports."

On how gold imports would affect the Indian economy, Anuj Gupta of HDFC Securities said, “Rising gold imports would fuel the rate of US dollar outflow from, which would put the Indian National Rupee (INR) under pressure. Indian dollar reserves would also come under pressure due to rising gold imports. The RBI can't afford the weakness of gold prices for longer, as in such a scenario, gold would become another crude oil for India. To avoid such a situation, RBI will have to either fish out its gold reserves to put a taper on gold import, or it will hit the Sovereign Gold Bond's upcoming series.”

Echoing Anuj Gupta's views, Amit Goel, Co-Founder & Chief Global Strategist at Pace 360, said, "Increased gold imports could lead to a higher outflow of foreign currency (dollars) since Gold is priced internationally in dollars. If the volume of imports rises substantially, it might strain the country's foreign exchange reserves and affect the rupee. While reducing gold duties might lead to increased imports, it can also be seen as a strategy to curb illegal smuggling and boost legal trade."

On how RBI will have to intervene to contain cheaper Gold, becoming the following crude oil for the national economy, Vaibhav Shah, Fund Manager at Torus Oro PMS, said, "With the cut in duties, the intent is to import Gold through official channels. While Gold leads to forex outflow, RBI has also increased its Gold reserves over the last few quarters. Thus, if a rise in imports leads to any threat, RBI can always provide the necessary supply. The current strength in gold prices can also be attributed to the record buying by Central banks worldwide over the last several quarters."

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